Unit One: Branch Accounting

UNIT ONE: BRANCH ACCOUNTING
Contents
1.0 Aims and Objectives
1.1 Introduction
1.2 Overview of Branch Accounting
1.3 Objectives of Branch Accounts
1.4 Accounting Systems
1.4.1 Centralized Accounting
1.4.2 Decentralized Accounting
1.5 Branch General Ledger Accounting
1.5.1 Intra Company Accounts
1.5.2 Home Office Allocations
1.5.3 Inventory Transfer Accounts
1.5.4 Fixed Asset Accounts
1.5.5 Other General Ledger Accounts
1.6 Branch Accounting Illustrated
1.7 Combined Financial Statements: Inventory Transfer at Home Office Cost
1.7.1 Producing Financial Statements for the Branch
1.7.2 Producing Financial Statements for the Entire Company
1.8 Combined Financial Statements: Inventory Transfer Above Home Office Cost
1.9 Summary
1.10 Glossary
1.11 Answer for Check Your Progress Exercises
1.12 Model Exam Questions
1.0 AIMS AND OBJECTIVES
When you have studied this unit you should be able to:
 prepare the parallel journal entries to be recorded on the books of a home office and its
branch office.
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 record the required entries on the books of a home office and its branch office when
shipment are made to the branch under the following conditions:
a) the shipments are made at the home offices cost.
b) the shipments are made at a price that exceeds the home offices cost
 adjust the unrealized profit in branch inventory account at the end of a firm’s
accounting period.
 prepare the combined financial statements for a home office and its branch office.
1.1 INTRODUCTION
Accounting for the operation of a business can become complicated whenever geographical
separation is encountered between the various facets of the organization. This unit examines
the special procedures necessary to record transactions occurring at significant distances from
a central office. Branch accounting is analyzed with illustrative examples.
1.2 OVERVIEW OF BRANCH ACCOUNTING
The extensive use of branch operations is especially common in modern retailing where
companies attempt to attract customers by offering the convenience of numerous outlets.
Relative small companies often attempt to expand their market base by establishing additional
outlets in nearby communities. This type of internal division is not even restricted to the retail
function. Branch operations are commonly found in banking as well as in manufacturing and
other industries.
1.3 OBJECTIVES OF BRANCH ACCOUNTS
A business firm establishes branches for marketing the products or services. The parent firm
(head office) is always interested to know the trading results of its branches. For this purpose,
branch accounts are kept. The main purposes of branch accounts are as follows:
(i) Branch accounts helps to know the profit or loss of each branch.
(ii) It enables the head office to know the financial position of each branch.
(iii) It shows the requirements of goods or cash for each branch.
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(iv) Branch account is the basis and helps the head office to control the activities of
branch.
(v) Suggestions and improvements are based on the branch accounts.
1.4 ACCOUNTING SYSTEMS
The home office must decide how to account for the activities and transactions of the
branches. Accounting systems can be categorized as either centralized or decentralized.
1.4.1 Centralized Accounting

Under a centralized accounting system, a branch does not maintain a separate general ledger
in which to record the transaction. Instead, it sends source documents on sales, purchases,
and payroll to the home office. Branches usually deposit cash receipts in local bank accounts,
which the home office draws upon. When the home office receives source documents, it
reconciles sales information with bank deposits, reviews and processes invoices for payment,
and prepares payroll checks and related payroll related records.
Centralized accounting systems are usually practical when the operations of the branches do
not involve complex manufacturing operations or extensive retailing or service activities.
1.4.2 Decentralized Accounting

Under a decentralized accounting system, a branch maintains a separate general ledger in
which to record its transactions. Thus, the branch is a separate accounting entity, even though
it is not a separate legal entity. It prepares its own journal entries and financial statements,
submitting the latter to the head office, usually on a monthly basis.
Decentralized accounting systems are common for branches that have complex manufacturing
operations or extensive retailing operations involving significant credit sales.
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1.5 BRANCH GENERAL LEDGER ACCOUNTING
1.5.1 Intra Company Accounts

A branch is established when a home office transfers cash, inventory, or other assets to an
outlying location. Because the home office views the assets transferred to the branch as an
investment, it makes the following entry:
Investment in branch - - - - - - - - - - - - - - - xx
Asset (s) - - - - - - - - - - - - - - - - - - - - xx
On receipt of the assets from the home office, the branch makes the following entry:
Asset(s) - - - - - - - - - - - - - - - - - - - - - - xx
Home office equity - - - - - - - - - - - - - - xx
The balance in the Investment in Branch account on the books of the home office always
equals the balance in the Home Office Equity account on the books of the branch. In practice,
these accounts are referred to as the Intra Company or reciprocal accounts.
accounts. At the end of
each accounting period, the branch closes its income or loss to its home office equity account.
Upon the receipt of the branch’s financial statements, the home office adjusts its Investment
in Branch account to reflect the branch’s income or loss and makes the offsetting credit or
debit to an income statement account called branch income or branch loss.
loss. As a result of
this entry and upon closing the branch income or branch loss account to retained earnings, the
branch’s income or loss is included in the home office’s retained earnings account.
1.5.2 Home Office Allocations

The home office usually arranges and pays for certain expenses that benefit the branches. The
most common example is insurance. In theory, some portion of the insurance expense should
be allocated to the various branches, so that the home office may determine the true operating
income or loss of each branch. In practice, however, allocation of home office expenses
varies widely. Numerous home offices allocate only those expenses that relate directly to the
branch operations, such as insurance. Some home offices without any revenue producing
operations of their own allocate all of their expenses to the branches.
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Check Your Progress Exercise 1
1. What is a branch?
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2. What are the basic purposes of branch accounting?
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1.5.3 Inventory Transfer Accounts

When inventory is transferred from the home office to a branch, all that has really happened is
that the inventory has physically moved from one location in the company to another. A sale
has not occurred, because sales takes place only between the company and outside customers.
To measure the profitability of a branch, however, an intra company billing must be prepared.
The branch uses special purchase account called Shipment From Home office to record these
inventory transfers and makes the following entry:
Shipments from home office - - - - - - xx

Home office equity - - - - - - - xx
The home office uses a special contra purchases account called Shipments to Branch to record
inventory transfers. If the inventory is transferred and billed at the home office’s cost, the
home office makes the following entry:
Investment in branch - - - - - - - - - - - - - xx
Shipments to branch - - - - - - - - - - - - - - xx
The branch’s ending inventory, cost of goods sold, gross margin, and operating profit or loss
depend on the amounts of these intra company billings.
1.5.4 Fixed Asset Accounts

Some home offices require their branches-fixed assets to be recorded on the books of the
home office instead of the books of the branches. Such a procedure automatically ensures
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that uniform depreciation methods and asset lives are used for all branches. The home office
usually charges the branch for the depreciation expense of its fixed assets. It does this by
crediting accumulated depreciation and debiting the Investment in branch account instead of
debiting depreciation expense. The branch debits depreciation expense and credits the Home
office Equity account instead of crediting accumulated depreciation. When fixed assets are
recorded on the home offices books, the fixed assets pertaining to the branch must be added to
the Investment in Branch account to evaluate the profitability of branch operations in relation
to the total assets actually invested in the branch.
1.5.5 Other general ledger Accounts

The branch maintains the balance sheet and income statement accounts necessary to record
transactions that take place between (1) the home office and the branch, and (2) the branch
and its customers, creditors, and employees.
1.6 BRANCH ACCOUNTING ILLUSTRATED
Assume that TANA Company, which prepares financial reports at the end of the calendar
year, established a branch in Motta on July 1, 1998. The following transactions occurred
during the formation of the branch and its first six months of operations, ending December 31,
1998.
1. The home office sent $ 28,000 cash to the branch to begin operations.
2. The home office shipped inventory to the branch. Intra company billings totaled
$60,000, which is the home office cost. (Both the home office and the branch use a
periodic inventory system.)
3. The branch acquired merchandise display equipment, which cost $ 12,000 on July 1,
1998. (Assume that branch fixed assets are not carried on the home office books.).
4. The branch purchased inventory costing $ 43,000 from outside vendors on account.
5. The branch had credit sales of $ 85,000 and cash sales of $ 35,000.
6. The branch collected $ 44,000 on accounts receivable.
7. The branch paid outside vendors $ 28,000.
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8. The branch incurred selling expenses of $ 15,000 and general and administrative
expenses of $ 12,000. These expenses were paid in cash when they were incurred
and include the expense of leasing the branch’s facilities.
9. The home office charged the branch $ 2,000 for its share of insurance.
10. Depreciation expense on the merchandise display equipment acquired by the branch
is $ 1,000 for the six month period. (Depreciation expense is classified as a selling
expense.).
11. The branch remitted $ 10,000 cash to the home office.
12. The branch’s physical inventory on December 31, 1998, is $ 33,000, of which $
25,000 was acquired from the home (there was no beginning inventory). The home
office’s physical inventory on December 31, 1998, is $ 150,000 (the beginning
inventory was $ 135,000). (Home office purchases were $ 285,000.). Cost of goods
sold is determined and recorded in a separate account for each accounting entity.
(Note that the year-end inventory accounts are adjusted in this entry to the year-end
physical inventory balances).
13. The branch closes its income statement accounts.
14. The home office prepares its adjusting entry to reflect the increase in the branch’s net
assets resulting from the branch’s operations. The following journal entries are
recorded by TANA Company’s home office and its Motta branch for the transactions
1 through 14.
Exhibit 1-1
Home office books Branch books
1. Investment in branch $ 28,000 1. Cash $ 28,000
Cash 28,000 Home office equity 28,000
2. Investment in branch - - - 60,000 2. Shipments

Shipments to branch 60,000 From home office 60,000
Home office equity 60,000
3. No entry 3. Equipment 12,000

Cash 12,000
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4. No entry. 4. Purchases 43,000
Accounts payable 43,000
5. No entry. 5. Cash 35,000

Accounts receivable 85,000
Sales 120,000
6. No entry. 6. Cash 44,000

Account receivable 44,000
7. No entry. 7. Accounts payable 28,000

Cash 28,000
8. No entry. 8. selling expenses 15,000

Administrative expense 12,000
Cash 27,000
9. Investment in Branch 2,000

Administrative expenses 2,000 9. Administrative expenses 2,000
10. No entry. 10. Selling expenses 1,000

Accumulated depreciation 1,000
11. Cash 10,000 11. Home office Equity 10,000

Investment in Branch 10,000 Cash 10,000
12. Inventory 15,000 12. Inventory acquired

From vendors 8,000
Shipments to Branch 60,000 Inventory acquired
From home office 25,000
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Cost of goods sold 210,000 Costs of goods sold 70,000
Purchases 285,000 Shipments from home office 60,000
Purchases 43,000
13. No entry. 13. Sales 120,000

Cost of goods sold 70,000
Selling expenses 16,000
Administrative expenses 14,000
14. Investment in Branch 20,000 14. No entry.

Branch income 20,000
Check your progress Exercise 2

What are the two types of accounting systems in branch accounting?
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1.7 COMBINED FINANCIAL STATEMENTS: INVENTORY

INVENTOR TRANSFERS AT
HOME OFFICE COST
1.7.1 Producing Financial Statements for the Branch

Before the branch prepares its closing entries and submits financial statements to the home
office, it must verify that its home office equity account and shipments from home office
account agree with the corresponding reciprocal accounts maintained by the home office. If
the accounts do not agree, there are two possible explanations:
1. A transaction by one of the accounting entities has been improperly recorded by the
other accounting entity. The accounting entity that made the error must make the
appropriate adjusting entry.
2. A transaction initiated by one of the accounting entities has been recorded by the
initiating entity but not yet by the receiving entity for example, cash transfers in transit,
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inventory shipments in transit, and intra company charges. Normally, the receiving
accounting entity prepares the adjusting entry as though it has completed the transaction
before the end of the accounting period.
Exhibit-1-2
Motta branch of TANA Company
Financial statements
Income statement
Year ending December 31, 1998
Sales $ 120,000
Cost of goods sold (70,000)
Selling expenses (16,000)
Administrative expenses (14,000)
Net income of branch 20,000
Home office account

Year ending December 31, 1998
Account balance, January 1, 1998 $-0–
Transfers from home office:
Cash 28,000
Inventory 60,000
Expense allocations:
Administrative 2,000 90,000
Transfers to Home office:
Cash (10,000)
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Net income (above) 20,000
Account balance, December 31, 1998 100,000
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Balance sheet
December 31, 1998
Cash $ 30,000
Accounts receivable, net 41,000
Inventory:
Acquired from vendors 8,000
Acquired from home office 25,000
Buildings and equipment, net 11,000
Total assets 115,000
Accounts payable and accruals 15,000
Home office equity (above) 100,000
Total liabilities and equity 115,000
Check your progress-3

If intra company accounts do not agree, what are some possible explanations?
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1.7.2 Producing Financial Statements for the Entire Company

Once financial statements for the Motta branch have been developed, TANA Company can
create a single combined set of statements for its entire organization. To achieve this
objective, the simulated union of the accounting records for TANA Company’s home office
and the Motta branch is presented in Exhibit 1-3 Generally accepted accounting principles
require that in reporting the results of operations to its shareholders, the home combine the
detail of the branch’s income or loss with the home office’s own accounts making up the net
income or loss from home office’s own operations. This is accomplished by substituting the
branch’s income statement for the branch income or loss account in the home office general
ledger. Likewise, generally accepted accounting principles require that in reporting the
balance sheet amounts to its shareholders, the home office combine the individual assets and
liabilities of both accounting entities and report the combined amounts. This is accomplished
by substituting the individual assets and liabilities of the branch for the Investment in Branch
account.
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Exhibit 1-3
TANA Company
Work Sheet to Combine Home Office and Motta Branch
Year Ended December 31, 1998
Home Elimination
Income Statement Branch Combined
Office Dr. Cr.
Sales $380,000 $120,000 $500,000
Cost of goods sold (210,000) (70,000) (280,000)
Selling expenses (52,000) (16,000) (68,000)
Administrative expenses (59,000) (14,000) (73,000)
Interest expense (19,000) (19,000)
Branch Income 20,000 20,000 -0-
Income Before Income Taxes 60,000 20,000 20,000 60,000
Income tax (40%) (24,000) 24,000
Net Income 36,000 20,000 20,000 36,000
Statement of retained earnings
Retained earning, Jan. 1, 1998 114,000 114,000
Home office equity (pre dosing) 80,000 80,000 -0-
+ Net income 36,000 20,000 20,000 36,000
- Dividends declared (10,000) (10,000)
Balance, Dec. 31, 1998 140,000 100,000 100,000 140,000
Balance Sheet
Cash 50,000 30,000 80,000
Accounts receivable, unit 60,000 41,000 101,000
Inventory 150,000 33,000 183,000
Land 22,000 22,000
Buildings and Equipment, net 118,000 11,000 129,000
Investment in Branch 100,000 100,000 -0-
Total assets 500,000 115,000 100,000 515,000
Accounts payables and accruals 60,000 15,000 75,000
Long-term debt 200,000 200,000
Common stock 100,000 100,000
Retained earnings 140,000 140,000
Home Office Equity 100,000 100,000 -0-
500,000 115,000 140,000 515,000
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1.8 COMBINED FINANCIAL STATEMENTS: INVENTORY TRANSFER ABOVE
HOME OFFICE COST
Inventory transfer can be priced at historical cost; however alternative procedures do exist. A
company can elect to record merchandise shipments at the normal sales price, at its variable
cost, at cost plus a predetermined mark up or at some other established value.
Any time transfers are made at above cost, the home office must defer recognition of the mark
up until the branch sells the inventory to its customers. To do otherwise would result in the
recognition of profit from transferring inventory from one location to another in the company.
To serve as an example assume that the inventory transferred to the branch from the home
office in Exhibit 1.1 was marked up 20% over the home office’s cost of $60,000. In Exhibit
1.2, we assumed that the branch had a $33,000 ending inventory, of which $8,000 represented
inventory obtained from home the office. In this case the branch’s ending inventory acquired
from the home office is $30,000 ($25,000 + $5,000 mark up). Thus, the branch’s total ending
should be adjusted downward to the amount that it would be if the inventory were transferred
from the home office at cost. Ending inventory is $38,000 (30,000 + 8,000). Exhibit 1.4
shows the journal entries for the transfer of this inventory above cost, along with the
appropriate year end closing and adjusting entries. The journal entries are numbered to
correspond Exhibit 1.1, which shows inventory transfers made at the home office’s cost.
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Exhibit 1.4
Home Office books Branch Books
2. Investment in Branch $72,000 2. Shipments from Home Office $72,000
Shipment to Branch 60,000 Home Office Equity 72,000
Unrealized Gain 12,000 Inventory Acquired from Vendors 8,000
12. Inventory 15,000 Inventory acquired from home office 30,000
Shipments to Branch 60,000 Cost of goods sold 77,000
Cost of goods sold 210,000 Shipments from home office 72,000
Purchases 285,000 Purchases 43,000
13. No entry 13. Sales 120,000
Cost of good sold 77,000
Selling expenses 16,000
Administrative expenses 14,000
14. Investment in Brach 13,000 14. No. Entry
Branch income 13,000
Unrealized gain 7,000
Branch Income 7,000
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When inventory transfers are made above home office’s cost, the branch’s cost of goods
sold should be adjusted downward to the amount that it would be if the inventory were
transferred from the home office at cost.
The adjustment of the branch’s cost of goods sold equals the amount of the unrealized
gain that was earned during the year and recognized by the home office. For TANA
Company branch the adjustment will be as follows:
Total unrealized gain at the time of inventory transfer to Branch ...............$12,000
...............$12,000
Unrealized gain related to ending inventory of
Branch on Dec. 31, 1998 (30,000 – 30,000/1.2) ...........................................(5,000)
...........................................(5,000)
Realized gain during the year ..........................................................................7,000
..........................................................................7,000
Likewise, the branch’s ending inventory should be adjusted. In this case the
adjustment is by the unrealized gain attributable to the ending inventory on the
balance sheet date. For TANA Company’s branch the amount equals $5,000.
Check Your Progress Exercise

When inventory is transferred from home office to branch, what account will be debited
in the books of the home office?
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1.9 SUMMARY
Many businesses have operating units in more than one location. These units may be
separate corporations, and a parent-subsidiary relationship exists between the parent
company and its affiliated companies. In other cases the operating units are not
incorporated but are part of one legal entity. In such an arrangement, each unit may be an
agency of the main location (the home office) or it may be a branch office.
A branch office may have its bookkeeping done at the home office based on transmittal
forms summarizing the daily activities of the branch. Alternatively, a branch may keep
its own books and accounts.
Shipments to a branch may be made at the home office’s cost or at an amount above its
cost.
1.10 GLOSSARY
Agency: An unincorporated unit that is an office in which orders are taken and then
transmitted to the home office for processing, billing, and shipping
merchandise.
Branch: An incorporated operating unit that carries a complete inventory of its own
from which it delivers merchandise to its customers.
Unrealized profit in branch inventory: The dollar amount billed to the branch above
the home office’s cost.
1.11 ANSWERS FOR CHECK YOUR PROGRESS EXERCISES

1. An incorporated operating unit that carries a complete inventory of its own from
which it delivers merchandise to its customers.
2. The main purposes of branch accounts are as follows:
- Branch accounts helps to know the profit or loss of each branch.
- It enables the head office to know the financial position of each branch.
- It shows the requirements of goods or cash for each branch.
- Branch account is the basis and helps the head office to control the
activities of branch.
- Suggestions and improvements are based on the branch accounts.

Centralized accounting and decentralized accounting.

A transaction by one of the accounting entities has been improperly recorded by the other
accounting entity. A transaction initiated by one of the accounting entities has been
recorded by the initiating entity but not yet by the receiving entity for example, cash
transfers in transit, inventory shipments in transit, and intra company charges.

Investment in Branch.
Branch.
1.12. MODEL EXAM QUESTIONS
1) The pre-closing general ledger trial balances at December 31, 19x5, for
Baltimore Company and its Atlanta branch are shown below:
Baltimore Company
General Ledger Trial Balances
December 31, 19 x 5
Home Office Branch
Dr. (Cr.) Dr. (Cr.)
Cash $36,000 $8,000
Accounts receivable 35,000 12,000
Inventory Home 70,000
Inventory Branch 15,000
Fixed Assets (net) 90,000
Investment in Branch 20,000
Accounts payable (36,000) (13,500)
Accrued expenses payable (14,000) (2,500)
Home office equity (9,000)
Capital stock (50,0000
Retained Earnings (45,000)
Home office
Sales (440,000)
Purchases 290,000
Expenses 44,000
Branch
Sales (95,000)
Purchases 24,000
Purchases from home office 45,000
Expenses 16,000
Total -0- -0-
Your audit disclosed the following:
1. On December 23, the branch manager purchased $4,000 of furniture and fixtures but
failed to notify the home office. The bookkeeper, knowing that all fixed assets are
carried on the home office books, recorded the proper entry on the branch records. It
is the company’s policy to take any depreciation on assets acquired in the last half of
a year.
2. On December 27, a branch customer erroneously paid his account of $2,000 to the
home office. The bookkeeper made the correct entry on the home office books but
did not notify the branch.
3. On December 30, the branch remitted cash of $5,000 which was received by the
home office in January 19x6.
4. On December 31, the branch erroneously recorded the December allocated expenses
from the home as $500 instead of $1,500.
5. On December 31, the home office shipped merchandise billed at $3,000 to the
branch, which was received in January 19x6.
6. The entire beginning inventory of the branch had been purchased from home office.
Home office 19x5 shipments to the branch were purchased by the home office in
19x5. The physical inventories at December 31,19x5 excluding the shipment in
transit, are home office,$55,000(at cost); and branch ;$20,000 (composed of $18,00
from home office and $2,000 from outside vendors).
7. The home office consistently bills shipments to the branch at 20%above cost .The
sales account is credited for the invoice price.
Required (Disregard income tax)

Prepare a worksheet showing Adjustments and Eliminations, Home office income
statement, Branch income statement, and Combined Balance sheet.
2. The following information came from the books and records of MM Corporation and
its branch. The balances as of December, 31, 19x2, the second year of operation’s
existence.
Home office Branch
Dr.(cr.) Dr.(cr.)
Sales ($800,000)
Expenses 275,000
Shipments to branch ($300,000)
Unrealized profit in
Branch inventory (65,000)
The branch purchases all of its merchandise from the home office. The home office ships
this merchandise at 120%of its cost. The ending inventory of the branch is $60,000 at the
billed price.
There are no shipments in transit between the home office and the branch.
Required
a) Compute the beginning inventory of the branch at the billed
price.
b) Compute the net income as reflected on the books of the branch.
c) Prepare the entries on the books of the home office to record the
true income of the branch.
UNIT 2: INTRODUCTION TO BUSINESS COMBINATION
Contents
2.1 Introduction
2.2 Overview of External Business Expansions
2.2.1 Terminology
2.2.2 Accounting Methods
2.3 Specific Terms and Provisions of the Acquisition Agreement
2.3.1 Types of Consideration Given
2.3.2 Types of Assets Acquired
2.3.3 Acquiring Assets Versus Common Stock
2.4 Resulting Organizational form of Acquired Business
2.4.1 Acquisition of Assets
2.4.2 Acquisition of Common Stock
2.5 Summary
2.6 Glossary
2.7 Answers for Check Your Progress Exercises
o explain the alternatives for business combinations.
o identify transactions as purchase or pooling of interests.
o determine whether the company is subsidiary of another.
o prepare entries to record combination.
2.1 INTRODUCTION
Business combinations arise when one or more companies become subsidiaries of

another company. Two different methods have been developed to account for business
combinations, acquisition accounting and pooling of interests.
This unit explains the need for business combination and the pooling of interest and the
purchase methods of accounting.
2.2 OVERVIEW OF EXTERNAL BUSINESS EXPANSIONS
As with any other economic activity, business combination can be part of an overall
managerial activity to maximize shareholder value. Business combination is bringing
together two or more separate businesses under common ownership.
If the goal of business activity is to maximize the value of the firm, in what ways do
business combinations help achieve that goal? Clearly the business community is
moving rapidly toward business combinations as a strategy for growth and
competitiveness. Size is obviously becoming critical as firms compete in today’s
markets.
Although no two business combinations are exactly alike, many share one or more of the
following characteristics that potentially enhance profitability:
 Vertical integration of one firm’s output and another firm’s distribution or further
processing.
 Cost saving through elimination of duplicate facilities and staff.
 Quick entry for new and existing products into domestic or foreign markets.
 Economics of scale allowing greater efficiency and negotiating power.
 The ability to access financing at more attractive rates. As firms grow in size,
negotiating power with financial institutions can grow.
 Diversification of business risk.
Check You Progress Exercise 1
1. What is business combination?
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2. How business combinations enhance quick entry for new markets?
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2.2.1 Terminology
A business combination refers to any set of conditions in which two or more
organizations are joined together through common control. The company whose business
is being sought is after called the target company.
The company attempting to acquire the target company’s business is referred to as the
acquiring company.
company.
The legal agreement that specifies the terms and provisions of the business combination
is known as the acquisition, purchase, or merger agreement.
agreement. The process of
attempting to acquire a target company’s business is often called a takeover attempt.
Business combinations can be categorized as vertical, horizontal, or conglomerate.
Vertical combinations take place between companies involved in the same industry but
at different levels.
Horizontal combinations take place between companies that are competitors at the same
level in a given industry.
Conglomerate combinations involve companies in totally unrelated industries.
2.2.2 Accounting Methods

The two basic methods of accounting for business combinations are the pooling of
interests method and the purchase method.
i. The pooling of interests method.

The theory underlying pooling of interests accounting is that a sale and purchase of a
business have not occurred. Two companies have simply pooled their financial resources
and managerial talents in such a manner that the owners of each of the separate business
are now the owners of an enlarged business. All of the following 12 necessary and
sufficient conditions must be met to use the pooling of interest method.
1. Each of the combining companies must be autonomous and must not have
been a subsidiary or division of another corporation during the two-year period
prior to the initiation of the combination plan.
2. At the dates the plan of combination initiated and consummated, each of the
combining companies must be independent of the other combining companies.
3. The combination must be effected by a single transaction or in accordance
with a specific plan within one year after the plan is initiated.
4. 90 percent or more of the outstanding common stock of a combining
company must be exchanged for the voting common stock issued by the surviving
or parent (issuing) corporation.
5. Each of the combining companies must maintain substantially the same
voting common stock interest.
6. The combining companies may reacquire shares of voting common stock
only for the purposes of other than business combination.
7. The ratio of the interest of an individual common stock holder to those of
other stock holders in a combining company must remain the same as a result of
the exchange of stock to effect the combination.
8. The voting rights of the common stock interests in the resultant combined
corporation must be exercisable by the stockholders.
9. The combination must be resolved at the date the plan is consummated.
10. The combined corporation must not agree directly or indirectly to retire to
reacquire all or part of the common stock issued to effect the combination.
11. The combined corporation must not enter into other financial arrangements
for the benefit of the former stock holders of a combining company.
12. The combined corporation must not intend to dispose of a significant part of
the assets of the combining companies within two years after the combination.

1. What is the difference between horizontal and vertical combination?
……………………………………………………………………………………………
……………………………………………………………………………………………
…………………………………………………………………………………………….
2. What is the theoretical rationale behind the pooling of interests method?
……………………………………………………………………………………………
……………………………………………………………………………………………
…………………………………………………………………………………………….
ii) The purchase method

If the transaction does not qualify for pooling of interests treatment, then the purchase
method must be used. The underlying concept of the purchase method is that one
company has acquired the business of another company and a sale has occurred. This
means that the stockholders of one combining company assume a dominant, controlling
interest in the combined company while the stockholders of the other combining
company do not participate in controlling the combined company.
2.3 SPECIFIC TERMS AND PROVISIONS OF THE ACQUISITION AGREEMENT
2.3.1 Types of Consideration Given

The consideration given by the acquiring company can be cash, other assets, or issuance
of debt, preferred stock, or common stock. Under the purchase method, the consideration
may consist of various combinations of cash, debt, and common stock. As stated earlier,
the consideration given in a transaction that qualifies for pooling of interests treatment is
the acquiring company’s common stock.
2.3.2 Types of Assets Acquired
Business may be acquired in one of two ways; the acquisition of assets or the acquisition
of common stock.
1. The acquisition of assets.
assets. The acquiring company obtains the assets, and
possibly liabilities, of the target company in exchange for cash, other assets,
liabilities, stock, or a combination of these. The second organization normally
dissolves itself as a legal corporation.
2. The acquisition of common stock.
stock. The acquiring company obtains more
than 50% of the target company’s outstanding common stock for a business
combination to have occurred. The original companies both dissolved, leaving
only the new organization remaining in existence.
2.3.3 Acquiring Assets Versus Common Stock

The following circumstances affect the determination of whether the acquiring company
should acquire assets or common of the target company.
i) Unrecorded liabilities: - If common stock is acquired, the buyer inherits
responsibility for the unrecorded liabilities. By acquiring assets, however, the
acquiring company can best insulate itself from responsibility for these
contingencies, as much as a well-drafted acquisition agreement will clearly
specify those liabilities for which it assumes responsibility.
ii) Non transferability of contracts: - If the target company’s contracts,
leases, or operating rights cannot be transferred through the sale of assets,
common stock must be acquired.
iii) Ease of transfer: - Transferring stock certificate is easier than transferring
assets.
iv) Access to target company’s cash. The acquisition of the assets makes the
target company’s cash and short term investment assets available to the
acquiring company.
Check Your Progress Exercise – 3
1. What types of consideration can be given under purchase accounting?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
2. What types of consideration can be given under pooling of interests accounting?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
2.4 THE RESULTING ORGANIZATIONAL FOR OF THE ACQUIRED BUSINESS
Accounting for business combinations focuses on how the acquiring company initially
records the transaction that brings about the combination. The detailed accounting
entries for the acquiring company require substantial explanation under both the purchase
method and the pooling of interests method: these are discussed in units 3 and 6
respectively. The following discussion is general in nature, so that an overall
understanding can be grasped of the organizational effects of business combination.
2.4.1 Acquisition of Assets

Assume A Company acquired all of the assets and assumed all of the liabilities of T
Company by giving cash as the consideration. The following entries (in condensed
format) would be made by each company.
A company T company
For the home office’s books
Investment in T - - xx Cash - - - xx
Cash - - - ---xx Assets - - - ----xx
For the books of T
Division of A company assets - - - - - - - - xx Liabilities - - xx
Liabilities - - - - - ---xx Gain (a)- - - - - - - - ----xx
Home office equity - xx Loss (b)- - - - - - ------- xx
If cash exceeds book value of net assets.

a) If cash is less than book value of net assets.
2.4.2 Acquisition of Common Stock

A company owning more than 50% of the outstanding common stock of another
company is referred to as the parent of that company. Conversely, a company whose
outstanding common stock is more than 50% owned by another company is referred to as
a subsidiary of that company. A subsidiary is a separate legal entity that must maintain
its own general ledger. But only the acquiring company (the parent) must make an entry
relating to the business combination.
1. Cash-for-stock exchange
If the acquired company gives cash as consideration for the target company’s outstanding
common stock, it makes the following entry.
Investment in subsidiary ---- - xx
Cash - ------------- - - - - xx.
2. Stock-for-stock exchange
If the acquiring company issues shares of common stock to effect the business
combination, the following entry would be made by the acquiring company.
Investment in subsidiary - - - - xx
Common stock - - - - - - - - - - - xx
Paid-in capital- - - - - - - - - - - - xx
This entry is slightly more involved in pooling of interests treatment applies (more about
this in unit 6)
2.5. SUMMARY
Business combinations are events or transaction in which two or more business

enterprises, or their assets, are brought under common control in a single accounting
entity. Purchase and pooling of interests are the two methods of accounting for business
combination.
2.6 GLOSSARY
- Acquiring company: - A company attempting to acquire the business of

another company.
- Acquisition agreement: - The legal agreement that specifies the terms
and provisions of a business combination.
- Horizontal combination: - A business combination that takes place
between companies involved as competitors at the same level in a given industry.
- Pooling of interest method: - A method of accounting for a business
combination whereby the assets of the acquired business are carried forward to the
combined corporation at their historical recorded amounts.
- Purchase method: - A method of accounting for a business combination
whereby the assets and liabilities of the acquired business are valued at their current
values based on the considerations given by the acquiring company.
- Vertical combination: - A business combination that takes place between
companies involved at different levels in a given industry.
2.7 ANSWERS TO CHECK YOUR PROGRESS EXERCISES

1. Business combination is bringing together two or more separate businesses
under common ownership.
2. Business combination enhances quick entry into new markets by purchases
part or whole of an existing business instead of starting from the scratch.
Check your progress Exercise -2

1. Horizontal combination is between companies involved as competitors at the
same level but vertical combination is between companies involved at different levels
in a given industry.
2. The theoretical rationale behind the pooling of interests method is that a sale or
purchase of a business have not occurred.

1. The consideration given can be cash, other assets, or assurance of debt,
preferred stock, or common stock.
2. The consideration given under the pooling of interests method is the
acquiring company’s common stock.
2.8 MODEL EXAM QUESTIONS
A. PBX Company acquired all of the assets of Sprit Company by

assuming all of its liabilities and paying $ 1,500,000 cash. Information with respect
to sprit as the date of combination follows:
Book Value Current Value
Cash $ 10,000 $ 10,000
Accounts receivable, net (including$ 30,000 due
from PBX Company) 90,000 90,000
Inventory 200,000 200,000
Land 400,000 500,000
Building and equipment 2,500,000 1,600,000
Accumulated depreciation (1,200,000) _______
Total assets 2,000,000 2,400,000
Accounts payable and accruals 300,000 300,000
Total liabilities 1,100,000 1,100,000
Common stock, $ 1 par value 100,000
Additional paid-in capital 500,000
Retained earnings 300,000
Total stockholders’ equity 900,000 1,300,000
Total liabilities and equity 20 00,000 2,400,000
Required
1. Does the acquisition appear to be a horizontal, vertical or
conglomerate type of combination?
2. Would the transaction be accounted for as a purchase or a
pooling of interests?
3. Is PBX Company the parent company of Sprit Company?
Why or why not?
4. Is sprit a subsidiary? Why or why not?
5. Is sprit a separate legal entity after the transaction has been
consummated?
6. Prepare the journal entry that would be made by sprit on
the date of the combination. Assume a 40% tax rate.
7. Prepare a balance sheet for sprit after recording the entry in
requirement 6.
8. Why did PBX pay $ 1,500,000 for a company whose net
assets are worth only $ 1,300,000?
9. How would PBX have determined the current value of
sprit’s net assets and liabilities?
B. Assume the same information as in the above

question(A), except PBX company gave as consideration 50,000 shares of its $ 10,
par value common stock (of which 950,000 shares are all ready outstanding) having a
market value of $ 30 per share. Assume that all conditions for pooling of interest are
met.
Required
At what amount would PBX record the assets acquired from sprit
UNIT 3:
3: THE PURCHASE METHOD OF ACCOUNTING AND CONSOLIDATED
FINANCIAL STATEMENTS AT DATE OF ACQUISITION
Contents
3.1 Introduction
3.2 Essence of Purchase Method
3.3 Determining Total Cost of Acquired Business
3.4 The Relationship of Total Cost to Current Value of the Acquired
Business’s Net Assets
3.5 Acquisition of Net Assets
3.6 Consolidated Financial Statements
3.6.1 Consolidation of Wholly Owned Subsidiary on Date of
Purchase-type Business Combination
3.6.2 Consolidation of Partially Owned Subsidiary on Date of
Purchase-type of Business Combination
3.7 Summary
3.8 Answers to Check Your Progress Exercises
3.0 AIMS AND OBJECTIVE
 prepare a consolidated balance sheet for combined companies.
 compute good will at the date of acquisition.
3.1 INTRODUCTION
Unit 2 introduced the purchase method and the pooling of interests method of accounting
for business combinations. Because these two methods are conceptually opposite, they
are best discussed and illustrated separately. Consequently, this unit and unit 4 and 5
cover the purchase method; unit 6 focuses on the pooling of interests method.
The purchase method can be applied to either form of business combination, the
acquisition of assets and the acquisition of common stock.
The procedures for preparing combined and consolidated balance sheets at the date of
acquisition are dealt with in this unit.
3.2 ESSENCE OF THE PURCHASE METHOD
The underlying concept of the purchase method of accounting is that one entity has
purchased the business of another entity. The acquiring company records at its cost the
assets or the common stock acquired. The cost is based essentially on the value of the
consideration give. If the cost is above the current value of the target company’s net
assets, then good will exists, which must be amortized over a period not to exceed 40
years.
The total cost of the acquired business equals the sum of the following:
1. The fair value of the consideration given.
2. The direct costs incurred in connection with the acquisition.
3. The fair value of any contingent consideration that is given subsequent
to the acquisition date.

1. What is the essence of the purchase method of accounting?
……………………………………………………………………………………………
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2. What are the costs of an acquiring company in a business combination
accounted for by the purchase method?
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……………………………………………………………………………………………
……………………………………………………………………………………………
3.3 DETERMINING THE TOTAL COST OF THE ACQUIRED BUSINESS
The cost of acquiring company in a business combination accounted for by the purchase
method is the total of:
(1) The amount of consideration paid,
(2) The direct “out-of-pocket” costs of the combination, and
(3) Any contingent consideration that is determinable on the date of the business
combination.
1. Amount of consideration
This is the total amount of cash paid, the current fair value of other assets distributed, the
present value of debt securities issued, the current fair (or market) value of equity
securities issued by the acquiring company.
2. Direct out-of-pocket costs

Included in this category are some legal fees and some accounting fees.
3. Contingent consideration
Contingent consideration is additional cash, other assets, or securities that may be
issuable in the future, contingent on future events such as a specified level of earnings.
Contingent consideration that is determinable on the acquisition date is recorded that is
determinable on the acquisition date is recorded as part of the cost of the combination;
contingent consideration not determinable on the date of acquisition is recorded when the
contingency is resolved and the additional consideration is paid or issued (or becomes
payable or issuable).
3.4 THE RELATIONSHIP OF TOTAL COST TO CURRENT VALUE OF THE

ACQUIRED BUSINESS’S NET ASSETS
Once the total cost of the acquired business is determined, the next step in purchase
accounting is to determine the current value of its assets and liabilities. The current value
is then multiplied by the acquiring company’s ownership interest in the acquired business
to obtain the acquiring company’s ownership interest in the current value of the net
assets. This amount is then compared to the total cost of the acquisition to determine if
goodwill exists.
Example
On December 31, 1999 Silva corporation acquired Wabash company. Both companies
used the same accounting principles for assets, liabilities, revenue, and expenses and both
had a December 31 fiscal year. Silva issued 150,000 shares of its $ 10 per common stock
(current fair value Br 25 a share) to Wabash’s sock holders for all 100,000 issued and
outstanding shares of Wabash’s no-par, $10 stated value common stock. In addition,
Silva paid $66,250 out-of-pock costs for the business combination.
Immediately prior to acquisition, Wabash’s condensed balance sheet was as follows:
Wabash Company.
Balance sheet (prior to business combination)
December 31, 1999.
Assets
Current assets - ------------- - - Br. 1, 000,000
Plant assets - - - - ------------- --- - 3,000,000
Other assets - - - - - ------------- - 600,000
Total assets - - - - ------------- - - - 4,600,000
Liabilities and stockholders’ equity
Current liabilities - ------------ - Br 500, 000
Long-term debt - - - - --------------- 1,000,000
Common stock, no-par,
$10 stated value - - - - - - - --------- 1,000,000
Additional paid-in capital - ------- - 700,000
Retained earnings - - - - - --------- - 1,400,000
Total liabilities and
Stock holders’ equity 4,600,000
The board of directors of Silva Corporation determined the current fair values of Wabash
Company’s identifiable assets and liabilities as follows:
Current assets - - - - - - - - - - - - - -Br.1, 150,000
Plant assets - - - - - - - - - - - - - --- - - - 3,400,000
Other assets - - - - - - - - - - - - - - - --- - - 600,000
Current liabilities - - - - - - - - - - - - -- - (500,000)
Long-term debt (present value) - - -- - (950,000)
Total identifiable net asset - - - - - - -- 3, 700,000
The condensed journal entries that follow are required for Siwa Corporation to record the
acquisition of Wabash on December 31, 1999, as purchase-type of business combination.
Silva Corporation.
Journal entries
December 31, 1999.
Investment in Wabash company common stock

(150,000 x Br.25)---------------------------------3,750,000
Br.25)---------------------------------3,750,000
Common stock (150,000 x 10)------------------------------1,500,000
Paid – In capital in excess of par - - - - - - - - - - - - ------ 2,250,000
To record the acquisition of Wabash as purchase
Investment in Wabash company common stock - - - - - - - - - - - - - --- 66,250
Cash -------------------------------------------- -----66,250
To record payment of out-of-pocket costs of business combination
Current assets - - - - - - - - - - - 1,150,000
Plant assets 3,400,000
Other assets 600,000
Discount on long-term bond 50,000
Goodwill 116,250
Current liabilities 500,000
Long-term debt 1,000,000
Investment in Wabash Company
Common stock (3,750,000 + 66,250) 3,816,250
To allocate total cost of acquisition to identifiable assets and liabilities, with the reminder
to goodwill
Amount of goodwill is computed as follows:
Total cost (Br.3, 750,000 + 66,250) - - - - $3,816, 250
Less: carrying amount of Wabash’s
Identifiable net assets (Br4, 600,000 – $ 1,500,000) $3,100,000
Excess (deficiency) of current
fair values of identifiable
net assets over carrying amounts:
Current assets - - - - - - - 150,000
Plant assets - - - - - - - - - 400,000
Long-term debt - - - - - - - - 50,000
3,700,000
Amount of goodwill $116,250
3.5 ACQUISITION OF NET ASSETS
The acquisition of assets is merely the purchase of the target company’s assets. Part of
the purchase price takes the form of assuming responsibility for the target company’s
existing liabilities.
Each asset and liability is recorded at its current value.
3.6 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated financial statements are similar to the combined financial statements

described in unit 1 for a home office and its branches. Assets, liabilities, revenues, and
expenses of the parent company and its subsidiaries are totaled; inter-company
transactions and balances are eliminate; and the final consolidated amounts are reported
in the consolidated balance sheet, income statement, stockholders, equity, and statement
of cash flows.
Consolidated financial statements are issued to report the financial position and operating
results of a parent company and its subsidiaries as though they comprised a single
accounting entity.
Definition A parent is an enterprise that has one or more subsidiaries.
Definition A subsidiary is an enterprise that is controlled by another enterprise

(known as the parent).
Definition Control is the power to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities.
This state of affairs requires a parent company generally to produce consolidated

financial statements showing the position and results of the whole group.
An investor’s direct and indirect ownership of more than 50% of an investee’s

outstanding common stock has been required to evidence the controlling interest
underlying a parent-subsidiary relationship.
3.6.1. Consolidation of Wholly Owned Subsidiary on Date of Purchase-type

Business Combination
There is no question of control of a wholly owned subsidiary. Thus, to illustrate
consolidated financial statements for a parent company and a wholly owned purchased
subsidiary, assume that on December 31, 1999 palm corporation issued 10,000 shares of
its $10 par common stock (current fair value $45 per share) to stockholders of Starr
company for all outstanding $5 par common stock of star. There was no contingent
consideration. Out-of-pocket costs of business combination paid by palm for finder’s
and legal fees on December 31, 1999 amount $50,000.
Assume also that the business combination qualified for purchase accounting because
required conditions for pooling accounting were not met, both companies had a
December 31, 1999 fiscal year and used the same accounting principles and procedures.
The balance sheets of Palm Corporation and star company for the year ended December
31, 1999 follow:
Assets palm corporation star company
Cash $ 100,000 $40,000
Inventories 150,000 110,000
Other current assets 110,000 70,000
Receivable from star company 25,000
Plant assets (net). 450,000 300,000
Patent (net) ________ 20,000
Total assets $ 835,000 540,000

Payable to palm corporation $25,000
Income taxes payable. $26,000 10,000
Other liabilities 325,000 115,000
Common stock, $10 par 300,000
Additional paid-in capital. 50,000 58,000
Total liabilities stockholders equity. $835,000 $540,000
On December 31,199, current fair values of star company’s identifiable assets and
liabilities were the same as their carrying amounts, except for the three assets listed
below.
Current fair values
December 31, 1999.
Inventories $135,000
Plant assets (net). 365,000
Patent (net) 25,000
Prepare the consolidated balance sheet at 31 December 1999.
Answer
Palm Corporation recorded the combination as a purchase on December 31, 1999, with
the following journal entries:
Investment in star common stock (10,000 x $ 45) 450,000
Common stock (100,000 x $ 10 100,000
Paid-in capital in excess of par 350,000
To record issuance of 10,000 shares of common stock for all the outstanding common
stock of star in a purchase type business combination.
Investment in star company common stock 50,000

Cash 50,000
To record out-of-pocket costs of business combination with star company

After the forgoing journal entries have been posted, the affected ledger accounts of Palm
Corporation are as follows:
____________________Cash____________________
Balance forward $ 100,000 50,000 out-of-pocket
Costs of business combination
Balance 50,000
Investment in star company common stock
$ 450,000 issuance of common stock
50,000 direct out-of-pocket costs of
business combination
500,000 balance.
Common stock_________________________
stock_________________________
300,000 balance forward,
100,000 issuance of common stock in business combination
400,000 balance
Paid-in capital in excess of par__________________________
par__________________________
$ 50,000 balance forward
350,000 issuance common stock in business combination
400,000 balance.
Now we can prepare the following consolidated balance sheet.

Consolidated balance sheet
December 31, 1999
Assets
Cash ($ 50,000 + 40,000) $ 90,000
Inventories ($ 150,000 + 135,000) 285,000
Other current asset ($ 110,000 + 70,000) 180,000
Plant assets (net) ($ 450,000 + 365,000) 815,000
Patent (net) (0 + $ 25,000) 25,000
Goodwill (net) 15,000
Total assets $ 1,410,000
Income-tax payable ($ 26,000 + 10,000) $ 36,000
Other liabilities ($ 325,000 + 115,000) 440,000
Additional paid-in capital. 400,000
Total liabilities and stockholder’s equity - - 1,410,000
The following are significant aspects of the foregoing consolidated balance sheet.
1. The first amounts in the computations of consolidated assets and liabilities
(except goodwill) are the parent company’s carrying amounts; the second amounts
are the subsidiary’s current fair values.
2. Inter-company accounts (parent’s investment, subsidiary’s stockholders’
equity, and inter-company receivable/payable) are excluded from the consolidated
balance sheet.
3. goodwill in the consolidated balance sheet is the cost of the parent company’s
investment ($ 500,000) minus the current fair value of the subsidiary’s identifiable
net assets ($ 485,000); or $ 15,000. The $ 485,000 current fair value of the
subsidiary’s identifiable net assets is computed as follows: $ 40,000 + 135,000 +
70,000 + 365,000 + 25,000 – 25,000 – 10,000 – 115,000 = $ 485,000.
3.6.2. Consolidation of Partially Owned Subsidiary on Date of Purchase-type
of Business Combination
The consolidation of a parent company and its partially owned subsidiary differs from the
consolidation of a wholly owned subsidiary in one major respect-the recognition of
minority interest.
interest. Minority interest is a term applied to the claims of stockholders other
than the parent company (the controlling interest) to the net income or losses and net
assets of the subsidiary. The minority interest in the subsidiary’s net income or losses is
displayed in the consolidated income statement, and the minority interest in the
subsidiary’s assets is displayed in the consolidated balance sheet.
Example
On December 31, 1999, Post Corporation issued 51,000 shares of its $1 par common
stock (current fair value $ 20 a share) to stockholders of sage company in exchange for
38,000 of the 40,000 outstanding shares of sage’s $ 10 par common stock in a purchase
type business combination. Thus, post acquired a 95% interest (38,000/ 40,000 = 0.95) in sage,
which became post’s subsidiary. There was no contingent consideration. Out-of-pocket
costs of combination, paid in cash by post on December 31, 1999 for finder’s and legal
fees amount $ 52,250.
The balance sheets of Post Corporation and sage company for their fiscal year ended
December 31, 1999, prior to the business combination, were as follows. There were no
inter-company transactions to the combination.
Assets post corporation sage company

Cash $ 200,000 $ 100,000
Inventories 800,000 500,000
Other current assets 500,000 255,000
Plant assets (net) 3,500,000 1,100,000
Goodwill (net) 100,000 _________
Total assets $ 5,150,000 1,915,000
Income taxes payable $ 100,000 $ 16,000

Other liabilities 2,450,000 930,000
Common stock, $ 1 par 1,000,000
Common stock, 10 par. 400,000
Additional paid-in capital. 550,000 235,000
Total liabilities and Stockholders’ equity 5,150,000 1,915,000
The December 31, 1999 current fair values of sage company’s identifiable assets and
liabilities were the same as their carrying amounts, except for the following assets:
Current fair values
December 31, 1999
Inventories $ 526,000
Leasehold 30,000
Post recorded the combination with sage as a purchase by means of the following journal
entries:
Investment in sage company common stock
(57,000 x $ 20) $ 1,140,000
Common stock (57,000 x $ 1) 57,000
Paid-in capital-in-excess of par 1,083,000
Investment in sage company common stock 52,250
Cash 52,250
Consolidated balance sheet of post
December 31, 1999.
Assets
Cash $ 247,750
Inventories 1, 326,000
Other current assets 765,000
Leasehold 30,000
Goodwill (net) 138,000
7,296,750
Income taxes payable. $ 116,000
Other current liabilities 3,380,000
Minority interest in net
assets of subsidiary 60,750
Common stock, $ 1 par 1057,000
Additional paid-in capital 1,633,000
Retained earnings 1,050,000
Total liabilities and stockholders’ equity 7,296,750
Workings
1. Shareholding in sage company.
Parent (post). 95%
Minority 5%
100%
2. Goodwill.
Cost of Post Corporation’s 95% interest in
Sage company $ 1,192,250
Less: current fair value of sage company’s identifiable
Net assets acquired by
Post ($ 1,215,000 x 0.95) 1,154,250
Good will acquired by post $ 38,000
3. Minority interest.
Current fair value of sage company’s
identifiable net assets 1,215,000
Minority interest share x 0.05
Minority interest in sage company’s
Identifiable net assets $ 60,750
Note
Consolidated financial statements are intended to provide information about a group of
legal entities-a parent and its subsidiaries-operating as a single entity. The assets,
liabilities, revenues, expenses, gains and loses of the various component entities under
the control of the parent are combined in the consolidated financial statements. For
partially owned subsidiaries, minority interests should be included in the consolidated
financial statements to reflect financial statements to reflect the claims of minority
stockholders’ in components of a consolidated enterprise.
3.7 SUMMARY
The key concepts discussed in this unit are summarized below:

 The acquisition of either assets or common stock results in a revalution of the
assets and liabilities of the acquired business to their current fair values.
 The total cost of any acquisition is the sum of (a)the fair value of the
consideration give,(b)any direct costs clearly traceable to the acquisition,
and(c)the fair value of any contingent consideration.

1. The essence of the purchase method of accounting is that one entity has
purchased the business of another entity.
2. The total cost of the acquired business equals the sum of the following:
- The fair value of the consideration given.
- The direct costs incurred in connection with the acquisition.
- The fair value of any contingent consideration that is given subsequent to
the acquisition date.
1. On May 31, 1999 Pimo Corporation acquired for $ 760,000 cash, including direct
out out-of-pocket costs of business combination, 80% of the outstanding common
stock of Sob Company. Sobo was to be a subsidiary of Pimo.
Additional information for May 31, 1999:
1. Sobo company’s total stockholders’ equity prior to the business combination

was $ $700,000
2. Differences between current fair values and carrying amount of Sobo’s
identifiable assets were as follows (the current fair values of Sobo’s other assets and
its liabilities equaled their carrying amounts):
Current fair Carrying

values amounts Differences
Inventories $ 120,000 $ 80,000 $ 40,000
Land 300,000 250,000 50,000
Building (net) 800,000 740,000 60,000
Totals $ 1,220,000 1070,000 150,000
Required.
Required.
1. What amount would be assigned to goodwill on May 31, 1999 based on
the parent company’s investment?
2. What amount would be assigned to minority interest in net assets of
subsidiary?
2. On March 31, 1999 Combiner Company issued 100,000 shares of its $1 par
common stock (current fair value $5 per share) for all issued and outstanding
common shares of combine company. Also on that date, combiner paid $70,000 out-
of-pocket costs for accounting and legal fees relating to business combination.
The balance sheet of combine on March 31, 1999, with related current fair values,
was as follows.
Combine Company
Balance sheet
March 31, 1999
Assets Carrying amount Current fair values
Current assets Br.200, 000 $260,000
Plant assets 400,000 480,000
Other assets 140,000 150,000
Total assets 740,000
Current liabilities $80,000 $80, 000
Common stock, no-par - 150,000
Total liabilities and stockholders’
Equity 740,000
Required
Prepare journal entries (omit explanations) for combiner company on March 31, 1999, to
record the business combination.
3. Single company’s balance sheet on December 31, 1999 was as follows:
Cash 100,000
Accounts receivable $ 200,000
Inventories 510,000
Plant assets (net) 900,000
Total assets $ 1,710,000
Liabilities 810,000
Common stock, $ 1 par 100,000
Total liabilities and Stockholders’ equity $ 1,710,000
On December 31, 1999, Poly Corporation acquired all the outstanding common stock of
single for $ 1,560,000 cash, including out-of pocket costs. On that date, the current fair
value of single’s inventories was $ 450,000 and the current fair value of single’s plant
assets was $ 1,000,000. The current fair values of all other assets and liabilities of single
were equal to their carrying amounts.
Required
Compute the amount of goodwill to be displayed in the December 31, 1999, consolidated
balance sheet of Poly Corporation and subsidiary.
UNIT 4: THE PURCHASE METHOD OF ACCOUNTING: SUBSEQUENT TO
DATE OF ACQUISITION
Contents
4.1 Introduction
4.2 Accounting for the Parent’s Investment
4.2.1 Cost Method
4.2.2 Equity Method
4.3 Consolidated Financial Statements Subsequent to Date of Acquisition
4.4 Summary
4.5 Glossary
4.6 Answer to Check Your Progress Exercises
4.7 Model exam questions
When you have studies this unit you should be able to:
 explain the equity method and the cost method.
 prepare consolidated financial statements subsequent to date of
acquisition.
4.1 INTRODUCTION
Unit three explained recording initially, under the purchase method of accounting, an
investment in an acquired business, and preparing consolidated financial statements as of
the acquisition date. This unit focuses on how to account for such investments for periods
subsequent to the combination date, and how to prepare consolidate financial statements
in such subsequent periods.
4.2 ACCOUNTING FOR THE PARENT’S INVESTMENT
For external reporting, consolidation of a subsidiary becomes necessary whenever control

exists. For monitoring the activities of its subsidiaries, the parent can use the cost method
or the equity method for internal record-keeping.
4.2.1 Cost Method
In the cost method of accounting, the parent company accounts for the operations of a
subsidiary only to the extent that dividends are declared by the subsidiary. Dividends
declared by the subsidiary from net income subsequent to the business combination are
recognized as revenue by the parent company; dividends declared by the subsidiary in
excess of post combination net income constitute a reduction of the carrying amount of
the parent company’s investment in the subsidiary. Net income or net loss of the
subsidiary is not recognized by the parent company when the cost method of accounting
is used.
4.2.2 Equity Method

In the equity method of accounting, the parent company recognizes its share of the
subsidiary’s net income or net loss, adjusted for depreciation and amortization of
differences between current fair values and carrying amounts of a purchased subsidiary’s
net assets on the data of the business combination, as well as its share of dividends
declared by the subsidiary.
Check your progress Exercise 1

1. What are the two methods of
accounting for the parent’s investment?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
2. In cost method of accounting, when
is the parent company account for the operations of its subsidiary?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
4.3 CONSOLIDATED FINANCIAL STATEMENTS SUBSEQUENT TO DATE OF

ACQUISITION
As a basis for this illustration, assume that parrot company obtains all of the outstanding
common stock of sun company on January 1, 1998. Parrot acquires this stock for
$760,000 in cash but pays an additional $40,000 in direct combination costs. Because
cash is paid, the purchase method is applicable; a pooling of interests requires that the
business combination be created only through the exchange of voting common stock.
The book values as well as the appraised values of sun’s accounts are as follows:
Fair market Value, Jan.
Book value Jan. 1, 1998
1, 1998
Current assets $320,000 $320,000
Land 200,000
Buildings (10 years life) 320,000 400,000
Equipment (5 years life) 180,000 150,000
Liabilities 180,000 150,000
Common stock, $40 par value 200,000
Additional paid in capital 20,000
Retained earnings, Jan. 1, 1998 380,000
The financial statement of parrot and Sun Company at 31, December 1998 were:
Parrot Company Sun Company
Income Statement
Revenues $1,500,000 $400,000
Expenses (900,000) (300,000)
Equity is subsidiary earnings 93,000 -0-
Net Income 693,000 100,000
Balance Sheet
Current assets $1,040,000 $400,000
Investment in sun company (at equity) 853,000 -0-
Land 600,000 200,000
Building (net) 370,000 288,000
Equipment (net) 250,000 220,00
Total assets 3,113,000 1,108,000
Liabilities 980,000 448,000
Common stock 600,000 200,000
Additional paid-in capital 120,000 20,000
Retained earnings; 12/31/98 1,413,000 440,000
Total liabilities and equities 3,113,000 1,108,000
Prepare the consolidated financial statement as of 31, December 1998. Goodwill is

amortized over a 20-year period using the straight time method.
Answers
 Good will
Cost of investment ($760,000 + 40,000) $800,000
Less: Current fair value of net assets of
Sun Company at the acquisition date $700,000
Goodwill $100,000
 A consolidation of the two sets of financial information is relatively
uncomplicated task. Understanding the origin of each reported figure is
the first step in gaining knowledge of this process.
- Revenues = $1,900,000. The revenue of the parent and the subsidiary are
added together.
- Expenses = $ 1,207,000. The expenses of the parent and the subsidiary
are added together along with the $ 7,000 amortization expense for the year.
Amortization
Additional depreciation for buildings
80,000 / 10 years $ 8,000
Decrease in depreciation for equipment 30,000 / 5 years (6,000)
Goodwill 100,000 / 20 years 5,000
Total $ 7,000
- Equity in subsidiary earnings = $ 0 – The investment income recorded by
the parent is eliminated so that the subsidiary’s revenues and expenses can be
included in the consolidated totals.
- Net income = $ 693,000 consolidated revenues less consolidated expenses.
- Retained earnings, 1/1/98 = $ 840,000. The parent figures only because
the subsidiary was not owned prior to that date.
- Dividends paid = $ 120,000. The parent company balances only because
the subsidiary’s dividends were paid inter company to the parent and not to an
outsides party.
- Retained earnings, 12/31/98 = $ 1, 43,000. Consolidated retained as of the
beginning of the year plus consolidated net income less consolidated dividends paid.
- Current assets = $ 1,440,000. The parent’s book value plus the
subsidiary’s book value.
- Investment in sun company = - 0. The asset recorded by the parent is
eliminated so that the subsidiary’s assets and liabilities can be included in the
consolidated totals.
- Land = $ 850,000. The parent’s book value plus the subsidiary’s book
value plus the current fair value adjustment of $ 50,000
- Buildings = $ 730,000. The parent’s book value plus the subsidiary’s
book value plus the $ 80,000 current fair value adjustment
- Equipment = $ 446,000. The parent’s book value plus the subsidiary’s
book value less the $ 30,000 current fair value adjustment plus the 1998 depreciation
expense reduction of $ 6,000.
- Goodwill = $ 95,000. Cost of investment less current fair value of Sun
Company’s net assets less $ 5,000 amortization expense for 1998.
- Total assets = $ 3,561,000. Summation of consolidated assets
- Liabilities = $ 1,428,000. The parent’s book value plus the subsidiary’s
book value.
- Common stock = $ 600,000. The parent’s book value since this
combination was a purchase.
- Additional paid-in capital = $ 120,000. The parent’s book value since this
combination was a purchase.
Parrot Company and Sun Company.

Consolidated financial statements
Consolidated income statement
For year ended December 31, 1998.
Revenues………………………. $ 1,900,000
Expenses ………………………. 1, 207,000
Net income………………………. 693,000

December 31, 1998.
Current assets $ 1,440,000
Land 850,000
Buildings (net) 730,000
Equipment (net) 446,000
Goodwill 95,000
Total assets 3,561,000
Liabilities 1,428,000
Common stock 600,000
Retained earnings, 12/31/98 1,413,000
Total liabilities and equities 3,561,000
Note: - summary of consolidated total subsequent to acquisition – purchase method.

- Current revenues: Parent revenues are included subsidiary revenues are
included but only for the period since acquisition.
- Current expenses: Parent expenses are included subsidiary expenses are
included but only for the period since the acquisition amortization expense is
included.
- Investment (or dividend): Income recognized by the parent is eliminated
so that the balance is not included in consolidated figures.
- Retained earnings, beginning balance: parent balance is included.
Subsidiary balance sine the acquisition is included.
- Assets and liabilities: Parent balances are included. Subsidiary balances
are included inter company receivable /payable balances are eliminated.
- Goodwill: Remaining unamortized balance is included.
- Investment in subsidiary: asset account recorded by parent is eliminated
so that the balance is not included in consolidated figures.
- Capital stack and additional paid-in capital: Parent balance only is
included although they will have been adjusted at date of purchase if stock was issue.
Check Your Progress Exercise -2

List three financial statement items that must be eliminated in the preparation of
consolidated financial statements.
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
4.4 SUMMARY
The key points discussed in this unit are summarized below:

- Parent companies may account for investments in subsidiaries using the
equity method or the cost method.
- The consolidated financial statements amounts are the same regardless of
whether the parent uses the equity method or the cost method.
- Only post acquisition income statement amounts can be consolidated.
4.5 GLOSSARY
Cost method A method of accounting for an investment in a subsidiary whereby the
carrying value of the investment is never changed unless it is permanently impaired.
Equity method A method of accounting for an investment in subsidiary whereby the

carrying value of the investment is (1) increased as a result of the subsidiary’s earnings,
(2) decreased as a result of the subsidiary’s loss, (3) decreased as a result of the dividend
declared on the subsidiary’s common stock, and (4) adjusted for the amortization of
goodwill.
Post acquisition earnings: Earnings of a subsidiary that occur subsequent to the

acquisition date.
4.6 ANSWER FOR CHECK YOUR PROGRESS EXERCISES

1. -Cost method
- Equity method
2. When dividends are declared by the subsidiary.

- Investment (or divided) income
- Investment in branch.
- Capital stock of subsidiary.
Pada Company acquired all of the outstanding common stock of Suda Company on April
1, 19x4, at a cost of $540,000. Suda’s capital accounts at the acquisition data were:
Common stock $90,000
The only assets and liabilities of Suda that were over – or – undervalued at the acquisition
date were as follows:
Patnet – overvalued by $40,000 (10-years remaining life).
Land – undervalued by $120,000
For 19x4, Suda had the following earnings and dividends:

First Remainder Total
Quarter of year
Net income $30,000 $70,000 $100,000
Dividends declared 20,000 60,000 80,000
Poda has chosen to use: (a) the equity method of accounting and (b) a five – year life for
goodwill.
Required
1. Prepared the journal entries Pada would make for the year ended Dec. 31, 19x4,
under the equity method.
2. Prepare the expanded analysis of the investment account as of the acquisition
date, and update, it for the entries developed in requirement.
UNIT 5: THE PURCHASE METHOD OF ACCOUNTING: - PARTIALLY OWED
SUBSIDIARIES
Contents
5.1 Introduction
5.2 Overview of Accounting for Minority Interest
5.3 Cost is Equal to the Parent’s Ownership Interest in the Current Value of the
Subsidiary’s Net Asset (Current Value is Equal to Book Values)
5.4 Cost is Above the Parent’s Ownership Interests in the Subsidiary’s Net
Assets (Current Value is Above Book Value)
5.5 Block Acquisition
5.6 Summary
5.7 Glossary
5.9 Mode Exam Questions
When you have studied this unit you should be able to do the following:-
- determine whether one company is a subsidiary of another
- prepare consolidate financial statement with minority interest
5.1 INTRODUCTION
Most subsidiaries are wholly owned. However, there are numerous partially owned
subsidiaries.
When the parent owned less than 100% of the subsidiary’s common stock, the interest of
the subsidiary’s other stockholders (hereafter called minority interest) must be accounted
in the consolidation process.
5.2 OVERVIEW OF ACCOUNTING FOR MINORITY INTEREST
The consolidation of parent company and its partially owned subsidiary differs from the
consolidation of a wholly owned subsidiary in one major respect the recognition of
minority interest. Minority interest is a term applied to the claims of stock holders other
than the parent company to the net income or losses and net assets of the subsidiary. The
minority interest in the subsidiary’s net income or losses is displayed in the consolidated
income statement, and the minority interest in the subsidiary’s net assets is displayed in
the consolidated balance sheet.
Example of minority interest computation

The separate summarized financial statements for the year to 31 December 1999 of P and
S are:
Balance sheet as at 31 December 1999.

P S
Cost of investment 1,800 -
Non-current assets 2,200 10,000
Total assets 5,000 11,000
Liability $- $8,000
Common stock 2,000 1,000
Total liabilities and equity 5,000 11,00
Income statement
Year ended 31 December 1999
P S
Sales revenue $4,000 20,000
Cost of sales 3,500 18,900
Gross profit 500 1,1000
Operating expenses 100 800
Operating income 400 300
Tax 270 160
Net income 230 140
P acquired 80% interest in S in 1998
In this case, the shareholding of minority share holders in S is 20% (100% -80%). Given
this shareholding of minority shareholders, minority interest can be calculated as follows:
Minority interest at 31, December 1999

Net assets of S at 31, December 1999 $3,000
Minority share x20%
Minority interest (Consolidated Balance sheet) 600
Net income of S for the year 1999 $140
Minority share x20%
Minority interest (consolidated income statement) 28

Pusho Company own 75% of the outstanding common stock of Share Company. Each
company’s 19x1 net income from its own separate operations is as follows:
Pusho Company $1,000,000
Share Company 200,000
Required
Determine the amount of the minority interest in the subsidiary’s net income
5.3 COST IS EQUAL TO THE PARENT OWNERSHIP INTEREST IN THE
CURRENT VALUE OF THE SUBSIDIARY’S NET ASSETS (CURRENT
VALUE IS EQUAL TO BOOK VALUE)
In this case we assume that none of the subsidiary’s assets or liabilities is over or under
valued, and the parent’s cost of acquiring is equal to the parents ownership interest in the
current value of the subsidiary’s net assets. Accordingly, only the book value element
exists.
Note
parent’s ownership Current Parent’s ownership

Interest in the = Value of interest
Subsidiary’s net assets the subsidiary’s In the subsidiary
Example
P company acquired 80% of S Company’s outstanding common stock on January 1,19x1
by paying, $48,000 cash. The current value of net assets (assets minus liabilities) as well
as the book value of the net assets was $60,000.
Required
1. Compute the parent’s ownership interest in the net assets of S Company on Jan,
1,19x1
2. Compute the minority interest in the net assets of S Company on Jan. 1,19x1.
Answer
1. The parent’s ownership interest in the subsidiary’s interest on Jan. 1, 19x1.
$60,000 x 8 = $48,000. This is equal to the cost of acquisition. There is no
goodwill.
2. Minority interest
$60,000 x .2 = $12,000
The minority interest is always equal to the minority interest ownership percentage times
the book value of the subsidiary’s net assets. To illustrate the preparation of consolidated
financial statement, assume on December 31, 19x1 Pele company, a calendary – year
reported company, acquired 75% of the outstanding common stock of pima company at a
total cost of $450,000. Each of pima’s assets and liabilities has a current value equal to its
book value. Each company’s financial statements for the year ended December 31, 19x1,
immediately after the acquisition date, are as follows.
Pele Company Pima Company

(000) (000)
Income statement (19x1)
Sales $800 $700
Cost of goods sold (500) (300)
Expense (2100) (280)
Net income 900 120
Balance sheet (as of Dec, 31, 19x1)
Current assets $2750 $1,200
Interest ment in Pima Company 450 -
Non – current assets (net) 4,800 1,000
Total assets 8,000 2,200
Liabilities 3,000 $1,600
Common stock 1,000 100
Additional paid in capital 2,000 200
Retained earnings 2,000 300
Total liabilities & equity 8,000 2,200
The subsidiary’s revenue and expense to be included in the consolidated income

statement are only post acquisition ones. The consolidated income statement of Pele for
year end Dec. 31, 19x1 includes only Pele’s revenue and expense since there is no post
acquisition revenue of expense of the subsidiary. The consolidated income statement is as
follows:

Year ended Dec, 31, 19x1 ($000).
($000).
Sales $8000
Cost of goods sold (500)
Expenses (200)
Net income 900
The consolidated balance sheet included the parents as well as the subsidiary assets and
liabilities. For Pele, the consolidated balance sheet as of Dec. 31, 19x1 is as follows:

Dec. 31, 19x1 ($000)
Current assets $3,950
Non current assets (net) 5,800
Total assets 9,750
Liabilities 4,600
Minority interest 150
Common stock 1,000
Additional paid in capital 2,000
Total liability and equity 9750
Note:
Minority interest = Net assets of pima company x Minority interest percentage
= (2,200 – 1,600) x .25
= $150
Only the parent’s common stock and in additional paid-in capital are consolidated.
Consolidated retained earnings is computed as follows:
Retained earnings – parent $2,000
Post – acquisition retained
Earnings x parents ownershipinterest percentage
($0 x 75%) -0-
Goodwill amortization -0-
2,000
5.4 COST IS ABOVE THE PARENT’S OWNERSHIP INTEREST IN THE
SUBSIDIARY’S NET ASSETS (CURRENT VALUE IS ABOVE BOOK
VALUE)
We now turn to consolidation when the subsidiary’s assets are under valued and the
parent’s purchase price includes on amount for goodwill. When the subsidiary has under
valued assets or goodwill, or both, the parent’s cost in excess of the subsidiary’s net
assets logically depends on the parent’s ownership interest. For example, assume that X
Company acquired 80% of Y Company’s outstanding common stock on January 1, 19x1,
by paying $90,000 cash. Thus, cost of acquisition is $90,000. The book value of net
assets is $60,000 on the acquisition date. The current values of Y Company’s assets and
liabilities are assumed to equal their book values, except for the following assets.
Book value Current value Current value

over book value
Inventory $32,000 $34,000 $3000
Land 30,000 42,000 12,000
Building and equipment 150,000* 156,000 6,000
* Net of $50,000 accumulated depreciation 20,000
X company ownership interest in the current value of the subsidiary’s (Y) net assets is
$64,000 [($60,000 + 20,000) x.8]. The $26,000 excess payment is for goodwill in
acquiring the common stock.
Therefore, the amount the acquiring company is willing to pay over the ownership
interest depends on the excess of current value over book value the amount of goodwill,
or both.
To illustrate consolidated financial statement preparation with minority interest and

goodwill assume POPP Company acquired 70% of the outstanding common stock of
Soda Corporation for $100,000 cash. Each company’s balance sheets December 31,
19x1, immediately after the acquisition date, are as follows.
POPP
Company Corporation SODA
Investment in Soda 100,000 -
Fixed assets (net) 270,000 100,000
476,000 142,000
Current liabilities 15,000 15,000
Capital stock 350,000 100,000
476,000 142,000
The current values of soda corporation’s assets and liabilities are equal their book value
values except fixed assets which are undervalued by $10,000.
POPP Company is willing to pay $100,000 cash for 70% ownership interest in the net
assets of Soda Corporation. The amount of goodwill is the excess of cost paid over the
value of net assets acquired. For popp Company, the amount of goodwill at the
acquisition date is $4,100. The working is as follows:
Cost of acquisitions $100,000

Soda corporation net assets
at the acquisition date 137,000
Ownership interest x70%
Share of net assets acquired by popp 95,900
Goodwill 4,100
The amount 0f minority interest in the net assets of Soda Corporation is $38,100
($127,000 x 0.3).
0.3). Minority interest is based on book value of net assets.
Now we can prepare the consolidate balance sheet on Dec. 31,19x1.

December 19x1
Current assets $148,000
Goodwill 4,100
Fixed assets 377,000*
529,100
Current liabilities 30,000
Minority interest 38,100
Capital stock 350,000
Retained earning 111,000
529,100
*377,000 =$270,000 + 100,000 + 10,000 x.7
Current fair value adjustment is only to the extent of the parent’s share.

Pinson Corporation owned 90% interest in a purchased subsidiary. During year 2000,
Pinson had income of $145,000 and the subsidiary has a net income of $120,000. There
was no goodwill in the combination and both companies did not declare divided.
Required
1. Compute the consolidated net income of Pinson Corporation and subsidiary for
year 2,000.
2. Compute the minority interest in the net income of the subsidiary for year 2000.
Ones you have the basic concepts for minority interest accounting, the next is the
preparation of consolidated financial statements subsequate to the date of acquisition.
This is illustrated with the following example; assume that on December 31, 19x1, Palm
Company acquired 75% of the outstanding common stock of Starr Company as at a total
cost of $450,000. Each of Starr’s assets and liabilities has a current value equal to its
book value. The balance sheet of Starr at the acquisition date is as follows.
Balance sheet, Dec. 31, 19x1
Current assets $1,200,000
Non – current assets (net) 1,000,000
2,200,000
Liabilities 1,600,000
Common stock 100,000
Retained earnings $300,000
2,100,000
Palm Company’s and Starr Company’s financial statementd as of December 31, 19x1
(one year after the acquisition date) are as follows:
Palm Company Starr Company
($000) ($000)
Income statement (19x2)
Sales $8,500 $900
Cost of goods sold (5,5000) (400)
Expenses (2,400) (320)
Income from subsidiary (135) -
Net income $735 180
Balance sheet
Current assets $2,545 $1720
Investment in Starr 450
Non – current assets (net) 5160 960
8155 2,400
Liabilities $2800 $1720
Common stock 1,000 100
Additional paid – in capital 2,00 200
Retained earnings 2355 380
8155 2,400
Divided declared paid 380 100
To prepare consolidated financial statements, follow the following steps:-
Step-1 Ownership interest percentage in Starr

Company
Palm 75%
Minority 25%
Step-2 Goodwill.
Cost of investment $450,000
Less: Share of net assets
Of Starr at the acquisition date 600,000
Palm’s share x 75% 450,000
Goodwill -0-
Step–3
Retained earnings
Palm Company $2,355,000
Starr Company 75% (380,000-300,000) 60,000
2,415,000
Step-4 minority interest

Net assets of Starr at the balance sheet date $680
Minority share x25%
170
Step-5 Consolidated financial statements

Year ended Dec. 31, 19x1
Sales $9,400
Expenses (2720)
780
Minority interest (25% x 180) 45
Profit attributed to palm 735
Divided paid by palm 380
Amount added to retained earnings 355
Consolidated balance sheet of palm and subsidiary

Dec. 31, 19x2
Current assets $3985

Non – current assets (net) 6120
10105
Liabilities $4520
Minority interest 170
Common stock 1,000
Retained earnings 2415
10105
5.5 BLOCK ACQUISITIONS
All the business combinations illustrated so for (in which the parent – subsidiary
relationship was formed) were assumed to result from a single acquisition of the acquired
company’s outstanding common stock. But in many cases companies gain control over
an entity by acquiring blocks of its common stock over a period of time. When the
acquiring company attains more than 50% ownership, the acquired company becomes a
subsidiary and consolidation procedures are appropriate.
5.6 SUMMARY
This unit discusses the following key points

1. Partially owned subsidiaries must be fully consolidated proportional consolidation
is not allowed
2. The parent company theory is the predominant practice in presenting minority
interest in the consolidated statements.
3. under the parent company theory: (a) the minority interest in the subsidiary’s net
income is shown as a deduction in arriving at consolidated net income; (b) the
minority interest in the subsidiary’s net assets is shown outside stockholders
equity; and (c) the subsidiary’s assets and liabilities are valued to their current
value only to the extent that the undervaluation is bought and paid for (like wise
for good).
4. Dividends paid to minority shareholders are always treated as a reduction of the
minority interest in the subsidiary’s net assets never as dividends of the
consolidated group.
5.7 GLOSSARY
- Block Acquisition Acquisitions in which blocks of an invitee company’s

outstanding common stock are acquired over time until the ownership level exceeds
50%.
- Minority interest The interest of the shareholders of a partially owned
subsidiary, other than the parent, in the subsidiary’s earnings, losses, and net assets.
- Parent Company theory A theory pertaining to how the assts and liabilities of
partially owned subsidiary and the related minority shareholders interests in the
subsidiary’s earnings and net assets should be valued and presented in consolidated
financial statements.
5.8 ANSWERS FOR CHECK YOUR PROGRESS QUESTIONS

Net income of share company
For the year 19x1 $200,000
Minority share x25%
Minority interest $50,000

1. Consolidated net income
Pinson corporation’s net income $145,000
Subsidiary net income $120,000
Ownership interest x90%
Pinson’s share of subsidiary income 108,000
Consolidated net income 253,000
2. Net income of subsidiary $120,000

Minority share x10%
x10%
Minority interest $12,000
A. PARR Company acquired 60% of the outstanding common stock of JUBB Company
on May 1, 19x5, at total cost of $273,000. JUBB’s capital account at the acquisition date
were :
Common stock ----------------------- $10,000
Retaining earnings ------------------- 240,000
All the SUBB’s assets and liabilities had current value equal to book values as of the
acquisition date, except copy rights, which has a current value of $90,000 and a book
value of $20,000. The copyriwites have a remaining life of 14 years. Goodwill was
assigned a nine-year life.
For 19x5, SUBB had the following earnings and dividend

Jan. 1- April 30 May 1- Total
19x1 Dec. 31, 19x
Net income $25,000 $55,000 $80,000
Dividends declared 15,000 60,000 75,000
Required
1. Prepare the journal entries PARR would make for the year ended December 31,
19x5, under the equity method.
2. Prepare an expanded analysis of the investment account as of the acquisition date
and update it through December 31, 19x5.
B. On January 1, 19x1, putt Man Corporation made the following investments:

a. It acquired 75% of the outstanding common stock of Shaft
Corporation for $14 cash per share. The shareholders equity of shaft on
January 1, 19x1, consisted of the following:
Common stock $10 par value $100,000

b. It acquired 60% of the outstanding common stock of Tee

Corporation for $40 cash per share. The shareholders equity of Tee on
January 1, 19x1, consisted of the following:
Common stock, $20 par value $60,000

Paid-in capital in excess of par 10,000
The current values of each subsidiary’s net assets equal their book values except for a
parcel of land owned by shaft that has current values of $40,000 less than its book value.
At the time of these acquisitions, putt man expected both companies to have superior
earnings for the next five years. Putt man has accounted for these investments using the
cost method. An analysis of each company’s retained earning for 19x1 is as follows:
Puttman Shaft Tee
Balance, Jan. 1, 19x1 $300,000 $20,000 $50,000
Net income (loss) 190,000 36,000 (15,000)
Cash divided declared (110,000) (24,000) (10,000)
Balance, December 31, 19x1 $380,000 32,000 25,000
Required
1. Under the equity method, what entries should have been made on the
books of the parent during 19x1 to record the following.
a) Investments in subsidiaries
b) Parent’s share of subsidiary net income or loss
c) Subsidiary dividends declared
d) Amortization in excess of (under) book value, if any
2. Compute the amount of minority interest in each subsidiary’s shareholders’ equity
at Dec. 31, 19x1.
3. What were the parent’s earnings from its own operations for 19x5, excluding
accounts relating to’ its ownership in these subsidiaries?
4. What amount should be reported as consolidated retained earnings as of Dec. 31,
19x1?
UNIT 6:THE POOLING OF INTEREST METHOD OF ACCOUNTING
Contents
6.0 Aims and objectives
6.1 Introduction
6.2 Criteria for Pooling of Interest
6.3 Specific Conditions for Pooling of Interest
6.4 Recording a Pooling Interest
6.5 Preparing Consolidated Financial Statement
6.6 Summary
6.8 Model exam questions
- record a pooling of interest
- Prepare consolidated financial statements under pooling of interest method
6.1 INTRODUCTION
In this unit, the pooling of interests method of accounting for a business combination is
discussed and illustrated.
Under the pooling of interests method, each company’s stockholders are presumed to
have combined or focused their ownership interests in such a manner that each group
becomes an owner of the combined, enlarged business. To accomplish this focusing of
ownership interests the target company or its stock holders must receive common stock
as consideration form the other company.
6.2 CRITERIA FOR POOLING OF INTERESTS
The twelve conditions generally allow pooling of interests treatment only when a
combination of independent equity interest occurs rather than a buy out of one of the
common stock holder equity interest. The more salient points of the criteria are as
follows.
1. Common stock must be the sole consideration given for the pooled interest.
a) Common stock exchanged for assets:- in this type of transaction, the target
company must transfers 100% of its assets to the issuing company solely for
common stock of the issuing company
b) Common stock exchange for common stock. In this type of transaction, at least
90% of the outstanding common stock of the target company must be exchanged
solely for common stock of the issuing company.
2. The common stock issued must have the same rights and privileges as the already
issued and outstanding common stock of the issuing company.
3. Neither combining company may alter its own equity interest or the equity
interest of the other combining company in contemplation of a pooling of interests.
4. There can be no arrangements to require the common stock issued as
consideration for the assets or common stock exchanged.
6.3 SPECIFIC CONDITIONS FOR POOLING OF INTERESTS
The twelve conditions for the pooling of interest method fit into three broad
categories:-
1. The attributes of the combining companies
2. The manner of combining equity interests
3. The absence of planned transactions
1. Attributes of the combining companies

Two conditions pertain to the necessary attributes of the combining companies.
a) Each of the combining companies is autonomous and has not been a
subsidiary or division of another corporation within two years before the plan
of combination is initiated.
This condition presumes that the pooling of interests concept applies only to
independent companies.
b) Each of the combining companies is independent of the other of combining
companies.
This condition means that at initiation date and until the business combination is
consummated, the combining companies cannot hold more than 10% of the
outstanding voting common stock of any combining company.
2. Manner of combining equity interests.

Seven conditions pertain to the manner of effecting the combination, as follows:
a) The combination is effected in a single transaction or is completed in
accordance with a specific plan within the year after the plan is initiated.
The transaction should be communicated within a reasonable period of time-one
year.
b) A corporation offers and issues only common stock with rights identical to those
of its outstanding voting common stock in exchange of substantially all of the
voting common stock interest of another company at the date the plan of
combination is consummated.
This condition is the fundamental requirement for a pooling of interests. It means that the
company issuing common stock must acquire at least 90% of the other combining
company’s outstanding common stock subsequent to the initiation date in exchange for
its own common stock. Thus, shares acquired prior to the initiated date-no matter how
acquired. Cannot be used to determine if the 90% requirement has been met.
c) None of the combining companies changes the equity interest of the voting common
stock in contemplation of effecting the combination either within two years before the
plan of combination of effecting the combination either within two years before the
combination is initiated or between the dates the combination is initiated and
consummated; changes in contemplation of effecting the combination may include
distribution to stock holders and additional issuances, exchanges, and retirements of
securities.
d) Each of the combining companies require shares of voting common stock only for
purposes other than business combinations (to be accounted for as pooling of
interests), and no company reacquires more than a normal number of shares between
the dates the plan of combination is initiated and consummated.
e) The ratio of the interest of an individual common stockholder to those of other
common stockholders in a combining company remains the same as a result of the
exchange of stock to effect the combination. Each shareholder of the target company
who exchanges common stock for voting common stock of the issuing company must
receive that voting common stock in exact proportion to his or her relative common
sock interest in the target company before the combination is effected.
f) The voting rights to which the common stock ownership interests are entitled are
exercisable by the stock holders; the stockholders are neither deprived of nor
restricted in exercising those rights for a period.
Any limitation on voting rights would obviously be inconsistent with the pooling of
interest concept.
g) The combination is resolved at the date the plan is consummated and no provisions of
the plan relating to the issue of securities or other considerations are ending.
This condition is intended primarily to prohibit pooling of interests when contingent
consideration is issuable baled on future sales, earnings, or maker price.
3. Absence of Planned Transactions

Three conditions pertain to certain types of post combination transactions that cannot be
included either explicitly or implicitly in either the negotiation or the terms of the
combination agreement. The conditions are as follows:-
a) The Combinating Corporation does not agree directly or indirectly to retire or
reacquire all or part of the common stock issued to effect the combination, which in
effect negates the exchange of securities.
b) The combined corporation does not enter into other financial arrangements for the
benefit of former stockholders of a combining company, such as a guaranty of
loans secured for stock issued in the combination, which in effect negates the
exchange of securities.
c) The combined corporation does not intend or plan to dispose of a significant part of
the assets of the combining companies within two years after the combination other
than disposals in the ordinary course of business of the formerly separate
companies and to eliminate duplicate facilities or excess capacity.

1. What is the essence of a pooling of interests?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
2. List the three broad categories of the twelve conditions for the pooling
of interests method.
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
6.4 RECORDING A POOLING OF INTERESTS
Assume the following information:

information:
1. P Company and S company have agreed to combine under terms that
providing for P Company to issue common stock (in exchange for either assets or the
outstanding common stock of S companies).
2. Information with respect to each company or of the combination data (January
1, 1941) is as follows:
P Company S Company
Common stock, $10 par value shares
outstanding) $300,000 $300,000
Common stock, $3 par value
(5,000 shares outstanding) $15,000
Additional paid – in capital 12,000 5,000
Retained trainings 100,000 40,000
Total stockholders eighty 412,000 60,000
Book value of assets Irrelevant $250,000
Current value of net assets Irrelevant 190,000
Current value of liabilities Irrelevant 80,000
Market price of stock on

Combination date $90 Irrelevant
3. All conditions for pooling of interests have been met.

4. P company issues 1,000 shares of its common stock
a) Common stock exchanged for assets

When assets are exchanged, the issuing company records these assets and liabilities
assumed at their book values as shown on the target business books.
The entry is as follows:-

Assets (recorded at book values) $250,000
Liabilities (recorded at book value) 190,000
Common stock (1,00 x $10 par value) 10,000
Retained earnings (100% of the target
company’s retained earnings) 40,000
Additional paid in capital (residual
amount to balance) 10,000
b) Common stock exchanged for common stock.

stock.
The entry when common stock is exchanged is nearly the same as when assets are
exchanged. The only difference is that rather than recoding assets and liabilities at their
book values, the investment in subsidiary account is debited an amount equal to the book
value of the net assets ($60,000 in the preceding example).
6.5 PREPARING CONSOLIDATED FINANCIAL STATEMENTS
Illustration
Assume that for 19x1, S company had net income of $15,000 and declared dividend of
$5,000. Using the information given earlier as to P company’s and S company’s account
balances. Illustration 6-1 and 6-2 show consolidating statement worksheet, assuming that
3,000 shares were issued to effects the combination.
Illustration 6-1
Date of Combination
P company and subsidiary (S company)
Consolidated worksheet as of Jan, 19x1
P S Elimination
Company Company Dr. Cr. Consolidated
Balance sheet
Cash $90,000 15,000 105,000
Accounts receivable, net 70,000 23,000 93,000
Inventory 100,000 32,000 132,000
Investment in S company 60,000 60,000 -0-
Land 220,000 30,000 250,000
Building and equipment 500,000 200,000 700,000
Accumulated deprecation (280,000) (50,00) (330,000)
Total assets 760,000 250,000 60,000 950,000
Liabilities 280,000 190,000 478,000
P company
Common stock 330,000 190,000 350,000
Additional paid in capital 2,000 2,000
S company
Common stock 15,000 15,000 -0-
Additional paid-in capital 5,000 5,000 -0-
Retained earnings 40,000 40,000 -0-
Total liabilities and equality 760,000 250,000 60,000 950,000
Illustration 6-2
First year subsequent to combination date
P Company and subsidiary (S company)
company)
P S Elimination
Consolidated
Company Company Dr. Cr.
Income statement
Sales 600,000 225,000 825,000
Cost of goods soled (360,000) (110,000) (470,000)
Expenses (190,000) (100,00) (290,000)
Inter company account
Equality in net income of S
company 15,000 15,000 -0-
Net income 65,000 15,000 65,000
Statement of retained earnings
Balance, Jan 1, 19x1 100,000 40,000 40,000 100,000
+ Effect of pooling 40,000 40,000
+ Net income 65,000 15,000 15,000 65,000
- Dividends declared (45,000) (5,000) 5,000 5,000 45,000
Balance Dec, 31 19x1 160,000 50,000 55,000 5,000 160,000
Balance sheet
Cash 115,000 11,000 126,000
Account receivable, net. 75,000 37,000 112,000
Inventory 110,000 55,000 165,000
Investment in S company 70,000 70,000 -0-
Land 220,000 30,000 250,000
Building and equipment 500,000 200,000 700,000
Accumulated depreciation (320,000) (63,000) (363,000)
Total assets 770,000 270,000 70,000 970,000
Liabilities 278,000 200,000 478,000
P Company
Common stock 330,000 330,000
Additional paid in capital 2,000 2,000
S company
Common stock 15,000 15,000 -0-
Additional paid in capital 5,000 5,000 -0-
Retained earnings 50,000 55,000 5,00 -0-
Total liabilities and equity 770,000 270,000 75,000 5,000 970,000
6.6 SUMMARY
Summary of key of points:

- A pooling of interest is a fusing together of ownership interests
- If any one of the twelve conditions is not met, then purchase accounting must be
used.
- The basis of accounting for the target company’s assets and liabilities is not
changed in a pooling of interests. Nor is good will ever regarded.
- Pre-combination earnings and dividends of the target company are always
combined with those of the issuing company but only to the extent of the
ownership interest exchanged whenever period prior to he combination data are
presented.
Check your progress Exercise -1

The essence of a pooling of interests method is that each company’s stock holders are
presumed to have combined or fused their ownership interests in such a manner that each
group becomes an owner of the combined, enlarged business.
A. On January 1, 19x1, P Company obtained 100% of the outstanding common

stock of company stock. Each company’s equity accounts as of the combination date
are as follows.
P Company S Company
Common stock, $10 per value $1,000,000
Common stock, $5 par value $50,000
Additional paid-in capital 25,000 20,000
1,225,000 150,000
Assume the business combination of qualifies for pooling of interests accounting.
Required
1. Prepare the entry to record the business combination, assuming P
issued.
a) 8,000 shares b) 14,000 shares
2. What amount should be reported as the consolidated retained earnings
at the combination date?
B. Assume the information provided in (A) above, except that P company

obtained only 90% of the outstanding common stock of S company.
Required
1. Present the entry to record the business combination, assuming P issued
a) 7,200 shares b) 12,600 shares
2. What amount should be reported as the consolidated retained earnings at the
combination date?
UNIT 7: CONSOLIDATED FINANCIAL STATEMENTS- INTER COMPANY
TRANSACTION INVENTORY, FIXED ASSETS
Contents
7.0 Aims and objectives
7.1 Introduction
7.2 Inventory Transaction at Cost and Above Cost
7.3 Fixed Assets – Depreciable and Non Depreciable
7.4 Summary
When you have studied you should be able to:

- list inter company transactions
- calculate unrealized inter company unrealized inventory profit.
7.1 INTRODUCTION
Companies within a consolidated group often have numerous types of inter company
transactions. Because such transactions take place between companies that are separate
legal entities (rather than between various divisions and the home office of a single
company), several conceptual issues are created. In preparing consolidated financial
statements, entities (called elimination earnings) are made on the consolidated worksheet
to undo these transactions. As a result, the consolidated financial statement is presented
as though these transactions had never occurred.
Inter company transactions among parent companies and subsidiaries consist of the
following types.
- sales of inventory
- transfer of long-lived assets
- leasing of long-lived assets
- bond investments
- loans
- services

Lists three types of inter company transactions.
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
7.2 INVENTORY TRANSFER AT COST AND ABOVE COST
(a) Inventory Transfer at Cost

Assume that P Company sold inventory costing $40,000 to its wholly owned subsidiary,
S company, in 19x1 for $40,000(no inter-company making). Assume also that by year-
end, S company had resold the entire inventory for $90,000. If no elimination entry is
made in consolidation at Decembers 31, 19x1, the following amounts would be reported
in the consolidated income statement:
Sales $90,000
Inter company cost of goods sold 40,000
Inter company cost of goods sold (40,000)
Gross profit 50,000
From a consolidated perspective, the only useful reported amounts are the $90,000 of
sales to outside third parts and the related consolidated entity’s $40,000 cost of goods
sold preparing to that sale. The fact that the inventory had been transferred between
companies with the consolidated group prior to the sale to the third party is irrelevant. It
would be misleading to report total sales of $80,000. Clearly, there is double consulting.
(b) Inventory Transfer Above Cost
Assume P Company sold inventory costing $40,000 to its wholly owned subsidiary, S
company, in 19x4 for $70,000. Also assume that by year end S Company had resold the
entire inventory for $90,000. If no elimination entry is made in consolidation at Dec. 31,
19x1 the following amounts would be reported in the consolidated income statement.
Income statement
Sales …………………………………………… $90,000
Cost of goods sold ………………………... (70,000)
Inter company sales ………………………. 70,000
Inter company cost of goods sold ………... (40,000)
Gross profit ………………………………. $50,000
As in the preceding example, the only useful reported amounts are the $90,000 of sales to
outside third parties and the related consolidated entity’s $40,000 cost of goods sold
pertaining to those sales. To achieve this meaningful reporting result, the two Inter-
company accounts must be eliminated and a downward adjustment of $30,000 to the cost
of goods sold account must be made.
Which inventory transfers are made above the selling entity’s cost and some of the
inventory remains on hand at the consolidated date, the unrealized inventory profit is
deferred until the acquiring entity sells the inventory to a third party consumer. The
elimination entry is as follows.
Inter company sales………………………………………………... xx

Inter company cost of goods sold …………………….. xx
Cost of goods sold ……………………………………. xx
Inventory ……………………………………………... xx
Example: Assume that in 19x1 P Company sells inventory costing $50,000 to its wholly
owned subsidiary for $75,000 and $15,000 of the inventory is reported in the subsidiary’s
balance sheet at Dec. 31, 19x1. Thus the subsidiary has changed to cost of goods sold
$60,000 of the $75,000 of inventory acquired from the parent. The following elimination
entry would be prepared:-
Inter company sales ………………………... 75,000

Inter company cost of goods sold 50,000
Cost of goods sold 20,000
Inventory 5,000

In 19x1, P company sold inventory costing $40,000 to its wholly owned subsidiary, S
company for $60,000 and $30,000 of the inventory is reported in the subsidiary’s balance
sheet at December 31, 19x4 calculate the amount of unrealized inventory profit at Dec,
31, 19x4.
7.3 FIXED ASSET TRANSFERS – DEPRECIABLE AND NON- DEPRECIABLE
If inter company transfer of fixed assets are made at the carrying values of the assets,
then no entries are necessary in consolidation because no inter company gain or loss is
recorded if transfers are made above or below the carrying value, the gain or loss must be
deferred. The reason for deferring gain or loss is the same as in the case of inventory
transfers no gain or loss of reportable on inters company transactions from a consolidated
view paint.
7.4 SUMMARY
This unit discussed the following key points:-

- In consolidation, all inter company transactions must be eliminated, So that the
consolidated financial statements reflect only transactions between the
consolidated group and outside parities.
- From a consolidated view point, inter company profit on inventory transfers
within the consolidated group is not considered realized until the acquiring entry
has disposed of the inventory.
- Transfer of fixed assets between companies within result in a reportable gain or
loss from a consolidated viewpoint.
7.5 ANSWERS TO CHECK YOUR PROGRESS EXERCISE
Check Your Progress Exercise - 1

Inter company transactions among parent companies and subsidiaries consist of the
following types.
- sales of inventory
- transfer of long-lived assets
- leasing of long-lived assets
- bond investments
- loans
- services
Check Your Progress Exercise - 2

Unrealized inventory profit
= $30,000- (30,000/1.5)
= $30,000 – 20,000
= $ 10,000
7.6 MODEL EXAM QUESTION
A parent company and its subsidiary had inter company transactions has been obtained
from the individual financial statement of each company:
Total On hand
Inter company sales $240,000 $36,000
Inter company cost of
good sold 180,000
Gross profit 60,000
Required
Prepare the elimination entry required in consolidation at the end of the year 19x1.

Unit One: Branch Accounting

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UNIT ONE: BRANCH ACCOUNTING

1.0 AIMS AND OBJECTIVES

1.2 OVERVIEW OF BRANCH ACCOUNTING

1.3 OBJECTIVES OF BRANCH ACCOUNTS

1.4 ACCOUNTING SYSTEMS

1.4.1 Centralized Accounting

1.4.2 Decentralized Accounting

1.5.1 Intra Company Accounts

1.5.2 Home Office Allocations

1.5.3 Inventory Transfer Accounts

Shipments from home office - - - - - - xx

1.5.4 Fixed Asset Accounts

1.5.5 Other general ledger Accounts

1.6 BRANCH ACCOUNTING ILLUSTRATED

2. Investment in branch - - - 60,000 2. Shipments

3. No entry 3. Equipment 12,000

5. No entry. 5. Cash 35,000

6. No entry. 6. Cash 44,000

7. No entry. 7. Accounts payable 28,000

8. No entry. 8. selling expenses 15,000

9. Investment in Branch 2,000

10. No entry. 10. Selling expenses 1,000

11. Cash 10,000 11. Home office Equity 10,000

12. Inventory 15,000 12. Inventory acquired

13. No entry. 13. Sales 120,000

14. Investment in Branch 20,000 14. No entry.

Check your progress Exercise 2

1.7 COMBINED FINANCIAL STATEMENTS: INVENTORY

1.7.1 Producing Financial Statements for the Branch

Home office account

Check your progress-3

1.7.2 Producing Financial Statements for the Entire Company

Check Your Progress Exercise

1.11 ANSWERS FOR CHECK YOUR PROGRESS EXERCISES

Check Your Progress Exercise 1

Check Your Progress Exercise 2

Check Your Progress Exercise 3

Check Your Progress Exercise 4

1.12. MODEL EXAM QUESTIONS

Required (Disregard income tax)

2.0 AIMS AND OBJECTIVES

Business combinations arise when one or more companies become subsidiaries of

2.2 OVERVIEW OF EXTERNAL BUSINESS EXPANSIONS

Conglomerate combinations involve companies in totally unrelated industries.

2.2.2 Accounting Methods

i. The pooling of interests method.

Check Your Progress Exercise 2

ii) The purchase method

2.3 SPECIFIC TERMS AND PROVISIONS OF THE ACQUISITION AGREEMENT

2.3.1 Types of Consideration Given

2.3.3 Acquiring Assets Versus Common Stock

2.4 THE RESULTING ORGANIZATIONAL FOR OF THE ACQUIRED BUSINESS

2.4.1 Acquisition of Assets

If cash exceeds book value of net assets.

2.4.2 Acquisition of Common Stock

Business combinations are events or transaction in which two or more business

- Acquiring company: - A company attempting to acquire the business of

2.7 ANSWERS TO CHECK YOUR PROGRESS EXERCISES

Check Your Progress Exercise – 1

Check your progress Exercise -2

Check Your Progress Exercise 3

2.8 MODEL EXAM QUESTIONS

A. PBX Company acquired all of the assets of Sprit Company by